By embarking on its first-ever normal course issuer bid, Genworth MI Canada Inc. is trying to send a signal to investors that it is not worried about its capital levels.
The company's stock is still trading below book value due to fears about Canada's housing market. Investors who think that the Canadian real estate market is in for a big decline have cited Genworth, the country's largest private-sector mortgage insurer, as a possible short for some time now. The company said late Tuesday that it plans to buy back up to five per cent of its shares.
"We've done a lot of work around our capital base," CEO Brian Hurley told analysts on a conference call Wednesday, adding that the company has gone through rigorous stress-testing of its portfolio.
"We're carrying a very strong capital base. And that's what you're seeing with our NCIB [normal course issuer bid], it's a first step," he said. "We looked at it, we realized we could weather those storms and still be in a very very strong capital position, so we decided to do this."
The key measure of the company's capital level, called the minimum capital test ratio, was about 216 per cent at the end of March, up six percentage points from the start of the year. It plans to keep its ratio above 190 per cent.
"I think the capital strength of the firm may be an under-appreciated part of the story," says CIBC analyst Paul Holden. "Lots of excess regulatory capital today, and that amount continues to build quarter after quarter. So it gives them a chance to buy back stock, which makes sense when you do it at a discount to book value."
The stock is currently trading at about 0.8 times book, he said.
Genworth also announced that, after receiving new data from banks about how quickly customers are paying down their mortgages, it now estimates that the outstanding balance on mortgages it insures was about $150-billion at the end of December, below previous estimates. While the government has imposed a cap of $600-billion on the amount of insurance that Canada Mortgage and Housing Corp. can have in force, it recently increased the amount that Genworth and its other private-sector competitor Canada Guaranty can have (combined) to $300-billion.
The downward revision in Genworth's estimate of its insurance outstanding gives the company more room to compete.
"It will certainly give them more room for growth than I think many people had assumed," Mr. Holden says.
While the demand for mortgage insurance has dropped since Finance Minister Jim Flaherty tightened the rules last July (including cutting the maximum length of an insured mortgage to 25 years from 30, a move that industry players say knocked a number of first-time buyers out of the housing market and contributed to the sharp drop in housing sales that has occurred since then), Genworth's executives said they expect it to pick up again in the second half of this year.
"Currently we're seeing balanced demand for single-family homes in both the GTA and Calgary markets," Mr. Hurley said. "This is contributing to steady home-price appreciation in these regions. Vancouver on the other hand continues to see a slowing of demand with a year-over-year decline in home prices, and this will remain a watch market for us."
He added that the company is limiting its exposure to condos in Toronto. "For Vancouver we're still doing mid-market loans, which we've always done," he said. "We are not participating in that higher-end which is seeing the correction. So we'll continue that footprint, and Vancouver I think the question is how does that pressure on the higher end filter down through the market."
(Tara Perkins is a Globe and Mail Real Estate Reporter.)
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